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The Composition of Compensation Policy: From Cash to Fringe Benefits


  • Patricia Crifo
  • Marc-Arthur Diaye


We develop a Principal-Agent model to analyze the optimal composition of the compensation policy with both monetary and nonmonetary incentives. We characterize nonmonetary benefits as symbols to capture a large set of non-wage compensations such as fringe benefits, status, identity (or self-image) or even sanctions. We determine the optimal composition of the compensation policy when the principal fully or imperfectly knows the agent's preferences. We first show that wages and symbols are relative substitutes at the bottom and relative complements at the top of the wage structure. Secondly, we show that offering a mixed contract is always more profitable when the principal has a relative comparative advantage compared to the agent's valuation of symbols. Finally, we analyze how the optimal mixed contract is modified when the principal faces further institutional constraints such as having to pay a fixed wage or symbol.

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  • Patricia Crifo & Marc-Arthur Diaye, 2011. "The Composition of Compensation Policy: From Cash to Fringe Benefits," Annals of Economics and Statistics, GENES, issue 101-102, pages 307-326.
  • Handle: RePEc:adr:anecst:y:2011:i:101-102:p:307-326

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